The Devil's Excrement

Long article in today’s El Nacional (page A-17, by subscription only) by banking analyst Francisco Faraco. Faraco is best known for his ratings of the banking system. In this article he gives out numbers that are quite scary. The article is long, thus instead of translation I will condense it in my own words.

The Minister of Finance announced that he is preparing a resolution so that ”excess” public funds in the banking system are returned to the Ministry. The Central Bank (BCV) said such funds amount to 37% of the budget and 26% of all deposits in the banking system, which implies that half of the internal debt was unnecessary.

However, this issuing of internal debt increased liquidity by 61%, forcing the Central Bank to issue its own liabilities in the form of CD’s to drain liquidity. This forces interest rates up and is a drag on the economy.

At the end of 2003, the banking system had 83% of all of the internal debt, add to this the BCV’s CD’s and the system had 8.7 trillion Bs. which gave the banking system Bs. 1.9 trillion in profits. Add to that some Bs. 400 billions and the banking system earned Bs. 2.3 trillion or 80% of its profits from Government deposits and paper.

If the Ministry of Finance delivers on its threat, eleven banks (3 public, 4 private and regional and four private and nationwide) or 27% of the system will need financial assistance from the Central Bank and 19 banks would start losing money. Additionally, two public banks would have to be liquidated and eight private ones would need to be capitalized, if they don’t want to be liquidated.

According to Faraco, all of this was possible because the Minister of Finance covered up the details of the expenses of the country, the Superintendent of Banks ignored the balance sheets of the banks,  the auditors approved false financials, the bankers looked the other way so as not to see the treachery of their colleagues and that nothing that has been said about al of these problems caught the attention of any National Assembly member, the Comptroller, the Attorney General or the Peoples’ Ombudsman.

Scary isn’t it?

Yesterday, Lina Ron, the pro-Chavez political activist held a rally to announce the creation of her political party Union Popular Venezolana. The rally was attended by numerous Chavista leaders and some Ministers. The rally was a tribute to the anti-democratic forces that support Chavez. Here are some quotes taken from today’s El Universal, El Nacional and Globovision

Lina Ron:

“There is a possibility that the CNE will allow the recall referendum, we can not accept it, I foresee that whether the answer is one or the other there is going to be a combat”

“My party is composed of the radicals, the tough ones, the violent ones”.

Minister of Infrastructure and former Vice-President Diosdado Cabello:

 “If two million signatures have to be eliminated, then they will be eliminated”

“I could care less about international opinion” (Said using a vulgar term)

“The opposition is preparing, with international backing, an institutional coup because we will not have a referendum because the signatures were not gathered”

This is the pretty and democratic revolution?

Yesterday, Lina Ron, the pro-Chavez political activist held a rally to announce the creation of her political party Union Popular Venezolana. The rally was attended by numerous Chavista leaders and some Ministers. The rally was a tribute to the anti-democratic forces that support Chavez. Here are some quotes taken from today’s El Universal, El Nacional and Globovision

Lina Ron:

“There is a possibility that the CNE will allow the recall referendum, we can not accept it, I foresee that whether the answer is one or the other there is going to be a combat”

“My party is composed of the radicals, the tough ones, the violent ones”.

Minister of Infrastructure and former Vice-President Diosdado Cabello:

 “If two million signatures have to be eliminated, then they will be eliminated”

“I could care less about international opinion” (Said using a vulgar term)

“The opposition is preparing, with international backing, an institutional coup because we will not have a referendum because the signatures were not gathered”

This is the pretty and democratic revolution?

There was little hard news this week as rumors seemed to dominate over actual facts the last two days. Among others, this is what was heard this week:

-The President of PDVSA might be removed over the conflict he had with Chavez’ former lawyer who had been named chief counsel for the company. PDVSA’s President Ali Rodriguez, fired Fabian Chacon as Chacon began making accusations of corruption within the oil industry, including a huge rip off in which PDVSA sol Diesel to a local company as an additive and this company exported it making millions. Luis Marin, the Head of CITGO is reportedly going to be Rodriguez’ successor.

-There were rumors that the Superintendent of Banks was ready to resign, which actually became official yesterday. Reportedly, Minister of Finance Nobrega will also leave and would be replaced with the Head of Cadivi, the foreign exchange control Office, Edgar Hernandez Behrens. I wonder if he will transfer the motto of the exchange control office: “God is love and prosperity” to the Ministry. Reportedly, former President of Central University and former head of the tax office, Trino Alcide Diaz will be named as Superintendent of Banks.

-A third rumor was that the Government was ready to: 1) Devalue, 2) Swap Bolivar debt held by banks for dollar denominated debt and 3) Issue a US$ 1.5 billion bond in local currency but denominated in US$. I understand all three have been proposed, but Chavez objected 1), the Central Bank 2) and 3) will only take place after 1) and 2) are decided on.

While, in my opinion, the swap makes sense form a technical point of view. It would seem that if the budget was calculated at an exchange rate of Bs. 1920 per US$, the swap should only take place after the currency has been devalued. Otherwise, it would be giving a huge windfall to the Venezuelan banking system, which has no justification.

These economic gems were said this week by various officials:

-The Supreme Court in rejecting the illegality of the current exchange controls:

“The Government did not impose exchange controls; it simply established policies to regulate monetary policy”

Well, in that case, it must be legal

–The Head of the Exchange Control Office on the benefits of Exchange controls:

“One of the blessings of exchange controls has been the increase in monetary liquidity”

Tell that to the Central Bank that has spent billions trying to drain it.

-The Head of the Finance Committee of the National Assembly on the rumors of devaluation:

“A maxi-devaluation is not being proposed, what has been agreed on is an adjustment on the parity of the currency due to inflation”

Oh, I see, since inflation was 27% it’s a mini devaluation!

These economic gems were said this week by various officials:

-The Supreme Court in rejecting the illegality of the current exchange controls:

“The Government did not impose exchange controls; it simply established policies to regulate monetary policy”

Well, in that case, it must be legal

–The Head of the Exchange Control Office on the benefits of Exchange controls:

“One of the blessings of exchange controls has been the increase in monetary liquidity”

Tell that to the Central Bank that has spent billions trying to drain it.

-The Head of the Finance Committee of the National Assembly on the rumors of devaluation:

“A maxi-devaluation is not being proposed, what has been agreed on is an adjustment on the parity of the currency due to inflation”

Oh, I see, since inflation was 27% it’s a mini devaluation!

Chavez celebrated today the eleven year anniversary of his bloody coup attempt during which 137 Venezuelans died, including a nine year old girl. During the celebration, Chavez announced that one of the most arrogant, despicable and obnoxious Generals in the Venezuelan military will be his candidate for Governor in Carabobo state. I choose not to blog today.

A reader sends me a note, asking me how I can be against the Government giving out bolivars at the official rate to foreign companies to pay dividends. The problem to me is the distortions and perversions you create with exchange controls. Moreover, you should set priorities and in any Government, whether “revolutionary” or not, you would think that health and food would be the priority. I am against exchange controls, period. They are and have always been a source of immense corruption and have never proven effective. Right now, dozens of Government officials are getting very rich thanks to them, orders of magnitude more than in the previous which were also a disgrace. The corrections they generate when they are removed are always traumatic. You would have thought that in Venezuela people would have learned the lesson, but clearly they have not. However, imposing exchange controls is a also source of additional power to be tapped by the power hungry. Going back to my reader, just imagine the following Gedanken Economic Experiment and you will understand:

The Manager of a foreign multinational is told every year to repatriate 50% of all profits in the form of dividends. Suddenly, exchange controls are imposed. There is an official rate of Bs. 1600 and a parallel rate of Bs. 3200 per US$. 50% of your profits are one million dollars at the official rate or Bs. 1.6 billion. You have been eyeing that land next to your factory which costs Bs. 3.2 billion or US$ 2 million at the official rate, or 100% of your profits for the year. Instead of paying the usual dividend of 50%, you pay 100% of all profits at the official rate, send US$ 2 million to your home office and immediately take one million and exchange it back in the parallel market at Bs. 3200. You have your home office buy that land with this money, courtesy of the Venezuelan Government, which paid for half of it and they also get to keep the original one million dollars in profits. You then pay rent to the home office for the land, which you can deduct from profits and pay less taxes. Magic? You bet! Such is the world of exchange controls.

Opposition representatives were in Washington DC today to meet with OAS Secretary General Cesar Gaviria and US Government officials. The purpose of the trip, led by Manuel Cova, one of the leading figures of the opposition who is said to be the front runner as candidate in an election to replace Chavez after a possible recall, was to express their concern over what has happened at the Elctoral Council in the last few days. After a number of irregularities surfaced last week, Chavez revived his charges of fraud and said he would hold a nationiwde TV program to explain to the country how the fraud was perpetrated. So much for respect for the CNE.  CNE Director  Jorge Rodriguez, accepted there were irregularities in how the forms were processed and the unusual jump in forms under observation and said a few employees were removed. He did defend the CIO of the CNE, who the opposition had asked to be removed from his position. The CIO was said to be a member of Patria para Todos. Rodriguez defended him saying the charges were unfounded. The other CNE Director Ezequiel Zamora blamed the jump in froms under observation on the CIO himself. In theory, there are only ten days left for the CNE to announce if it accepts or not the opposition signatures requesting a recall referendum vote for Hugo Chavez.